Munich Personal RePEc Archive

A Naïve Sticky Information Model of Households’ Inflation Expectations

Lanne, Markku and Luoma, Arto and Luoto, Jani (2008): A Naïve Sticky Information Model of Households’ Inflation Expectations.

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Abstract

This paper provides a simple epidemiology model where households, when forming their inflation expectations, rationally adopt the past release of inflation with certain probability rather than the forward-looking newspaper forecast as suggested in Carroll [2003, Macroeconomic Expectations of Households and Professional Forecasters, Quarterly Journal of Economics, 118, 269-298]. The posterior model probabilities based on the Michigan survey data strongly support the proposed model. We also extend the agent-based epidemiology model by deriving for it a simple adaptation, which is suitable for estimation. Our results show that this model is able to capture the heterogeneity in households’ expectations very well.

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